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Raul Estrada - CIC paper 2010

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Raul Estrada - CIC paper 2010

  1. 1. Running head: CHINA. A CULTURAL STRATEGIC APPROACH 1 China. A cultural strategic approach Raúl Estrada Lavilla* University of Cádiz 2010 International Symposium on East and West Cultures and Management Zhejiang University, Hangzhou, CHINA * For helpful guidance and support, I am very grateful to Prof. José Ruiz Navarro and Prof. Alfonso Galindo Lucas from the University of Cádiz. I would especially like to thank Dr. Fábio Teodoro de Souza from TsingHua University for his inestimable cooperation. Errors remain my own. Correspondence concerning this article can be sent to restrada@economistas.org
  2. 2. CHINA. A CULTURAL STRATEGIC APPROACH 2 Abstract The main goal of this paper is to set the basis for the quantification of cultural difference and for the introduction of the impact of multiculturalism in multi-agent decision making models. After a brief historic, economic and cultural contextualization of China as a country of special interest for foreign investors (Section 1) and a brief presentation of the importance of cultural factors in Business Management, especially in international and global companies (Section 2), the results of a new research are presented (Section 3). This research has been done using a panel of more than 50 experts and focuses on the key factors affecting international expansion of firms. The research also considers the markets which represent a higher level of a priori difficulty when trying to approach them. Later on, starting from Giovanni M. Gavetti and Massimo Warglien’s multi-agent model, which is based in Hopfield’s neural networks model, a generalization towards a Multi-Cultural model is performed. The introduction of the Cultural Intelligibility Coefficient (CIC) is the key to obtaining a wider set of conclusions from the mathematical model (Section 4). None of this would be totally complete without a practical application. Consequently, the justification of the importance of proper cultural planning and management, and the maximization of the CIC as an effective means to achieve a sustainable competitive advantage completes the goal of the article (Section 5). Keywords: Corporate Strategy, Cross-cultural Communication, Global Company, Human Capital
  3. 3. CHINA. A CULTURAL STRATEGIC APPROACH 3 Introduction Strategic decisions involve a large number of variables and it is extremely difficult to put all those variables together in just one analytic model. When an individual has to make a strategic decision, he considers the current situation and the feasible alternatives available, but he also includes his previous experience in the decision process. He then tries to anticipate the medium and long term implications of each alternative with the aim of maximizing the positive effect of the decision. This paper studies the influence of cultural differences in that strategic decision process. In order to elucidate the real scope of this article, the limits considered for certain variables should first be outlined. Geographic area: People’s Republic of China, not only for its unquestionable interest as a growing center of productive activity, but also for its potential market and its remarkable growth rate; company size: small and medium size enterprises (SME’s), mainly because they usually have a more diffused organizational culture and also because they normally face stronger difficulties in implementing their original values in new locations. Similarly, it is also important to emphasize that generally speaking, SME’s have less capacity to conduct their customized market research as well as less financial ability to absorb the cost overrun induced by the internationalization of the company. Finally, in relation to the specific kinds of decisions and decision makers involved, the study focuses on the importance of communication management among the strategic decision makers. Additional details about what is out of the scope of the paper are also necessary. The goal of this study is definitely not to explain patterns of behavior observed among Chinese strategic decision makers, nor is it to explain how to do business in China. It does not lie within the scope of this research to create a comprehensive strategic decision making analytic model. It is also out of the scope of this paper to deepen the study of mental processes or linguistic characteristics that form the basis for interpretation of novel situations and communication among individuals. Multiple decision models are available but none of them has explicitly considered the impact of multiculturalism. The main goal of the study is achieved through the generalization of the multi-agent model of analogy by introducing the generalization related with cultural diversity, that is to say, to conclude with a multicultural model. Finally, keeping in mind the priorities of SME’s, the importance of cultural management as a key differentiating factor, capable of creating a sustainable competitive advantage is studied.
  4. 4. CHINA. A CULTURAL STRATEGIC APPROACH 4 Section 1. China now. A country of opportunities Together with the Sumerian, Egyptian and Indus Valley states, in Eurasia, and the Mesoamerican and Peruvian states, in America, the Yellow River state is considered to be one of the six pristine or primary states. Pristine states are those which arise in a context of interacting pre-state societies, without influence from other states (Lewellen, 1983). Partly as a consequence of this early emergence, China has a long tradition of scientists and entrepreneurs, as well as landmark inventions. China is located in East Asia and is the fourth biggest country in the world by extension. The Chinese population represents almost 20% of the World population (1,330,044,544 according to the June 2008 estimate of the CIA) and the Han ethnicity represents about 91.5% of the total population in China. The official language in China, Putong Hua or Mandarin, is the most spoken language in the world, followed by Hindi and Spanish1 . Until MAO Zedong founded the People’s Republic of China in 1949, China went through several dynasties of Emperors, with the Ming, Qing and Yuan dynasties being the most recent and the Han dynasty probably the most well known. Some conflicts have taken place with China’s neighboring countries, and some of them such as territorial conflicts with Bhutan, Vietnam and India have not been solved yet. Nowadays, commercial interests are reducing the intensity of disputes with Japan and Taiwan (which is considered by China as its 23rd province). Hong Kong and Macau have special regimes and the Tibet issue is probably the one with highest awareness outside China. MAO Zedong’s successor, DENG Xiaoping was the man responsible for the opening up of the country after 1978 and China is currently a member of the WTO and one of the permanent members of the security council of the UN. China has continuously been achieving more and more economic and geopolitical importance during the past two decades and this trend is likely to continue. The Chinese economy is the second largest economy in the world at this moment, being the economy of the U.S. the first and the Japanese economy the third2 . Moreover, the growth rate experienced by the Chinese economy during the past few years is one of the highest in the world. China is also the second largest exporter in the world, with a 1 Estimation of Ethnologue for 2005 2 GDP, APP, CIA World Factbook
  5. 5. CHINA. A CULTURAL STRATEGIC APPROACH 5 similar exports amount to that of Germany (first) and that of the USA (third). China’s main commercial partners are Japan, Korea, the USA and Germany. The industrial sector represents about half of China’s GDP3 . Multiple sources consider China as the biggest potential market in the world, with a high probability of surpassing the USA in the coming years. In spite of all the previous objective and positive signals, studying a few other indicators could be helpful to situate China in relation to the two groups of countries used as a reference. The first group consists of the USA, EU and Japan, and the second group contains countries such as Brazil and India. Some of those indicators consider the level of education of the population and the internet penetration rate. According to UNESCO Institute for Statistics, in 2007 the rate of adult alphabetization in China was higher than 90%. This rate is a clear indicator of the improvement achieved from the 65% estimated for 1982. Notwithstanding, the real situation varies depending on the specific area and age group considered. Some sources estimate Chinese people only represent 2‰ of the Spanish speaking community and about only 20 Universities have a major in Spanish. Compared to the Chinese population and total number of Universities, those figures are extremely low and although they are rapidly increasing, the number of professionals who can speak Spanish and have some knowledge of Spanish culture (Spain and South America) is so low that it makes them be a scarce and hence, expensive resource. TOTAL ALUMNOS GRADUADOS (Educación Superior) 1,775,999 1,081,435 347,978 260,225 2,150,954 5,622,795 1,067,939 757,553 285,957 2,639,006 0.42% 0.84% 0.39% 0.71% 1.11% 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 China Japón Brasil España EE.UU. 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 2,000 2006 2008 (%) Figure 1. Source: UNESCO Institute for Statistics 3 CIA World Factbook TOTAL GRADUATED STUDENTS (Higher Education) Japan Brazil Spain USAChina
  6. 6. CHINA. A CULTURAL STRATEGIC APPROACH 6 As seen in Figure 1, China has experienced a much higher increase in the number of students enrolled in superior education programs than any other country considered. However, if we discount the percentage of students, the difference with the USA, Japan or even Spain, is still large. In relation to the number of internet users, that is a more accurate predictor of the exposition of the a certain country’s population to a global or standard culture, in Figure 2 it can be seen that, according to the UNESCO Institute for Statistics, China has almost 20% of its population connected to the internet4 . This figure places China on a similar level to that of India or Brazil, but still very far from the 70% of Japan or the even higher rate of the USA. USUARIOS INTERNET 253,000,000 247,000,000 223,000,000 88,110,000 80,000,000 50,000,000 19.02% 50.30% 73.40% 69.22% 6.97% 25.47% 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 China U.E. EE.UU. Japón India Brasil 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% Usuarios % Figure 2. Source: UNESCO Institute for Statistics In the last ten years, the number of students enrolled in Chinese Language and History programs has more than tripled, increasing from sixty thousand to almost two hundred thousand students. It has been estimated that the average period of time necessary to command the Chinese language and to speak it with fluency is about eight years, clearly longer than the average for Indo-European languages. Professionals with a good command of English are still a scarce resource outside of the main industrial areas in China. Section 2. Introduction to cultural differences. Plenty of bibliographic references are available to those looking for guides explaining how to do business in almost every country in the world, providing primers on local habits and etiquette. Most of those books contain warnings 4 Estimations vary depending on the source. Data published by Nielsen, NetRatings and other global Marketing research firms lower China’s internet penetration rate to about 8.5% INTERNET USERS Japan BrazilIndiaUSAChina EU Users
  7. 7. CHINA. A CULTURAL STRATEGIC APPROACH 7 about the cultural shock that may arise in multiple situations and about the implications too. Business etiquette bibles and case studies are also provided and several companies share their own experience to prevent newcomers from making the same mistakes. Some manuals show a bilateral comparison and provide very detailed explanations for companies of a certain culture (Llamazares, 2007) while other focus on a specific topic and deeply review the differences between two specific cultures (Written Communication Across Cultures, Yunxia Zhu, 2005). There are also practical studies performed by bicultural people. These studies usually include highly valuable personal experiences, interviews and comparative points of view about the impact of cultural differences (Ruiz-Tagle, 2008). A deeper level is reached within the area of study known as multicultural communication (also cross-cultural communication), which includes different perspectives ranging from Linguistics, Anthropology, Sociology, Psychology or Philosophy. Some authors, such as Edward T. Hall, Richard D. Lewis or Geert Hofstede, study the different ways in which people from different cultures encode and decode the messages, deal with symbols and the way those symbols are applied to economy and politics. Semiotics 5 is the most specific field of study about the relation between symbols and significances and how people associate both of them together. Very valuable information is provided by semiotics but its content lies out of the scope of this paper. In multicultural environments, apart from dealing with the presence of different languages, the most important thing is the different cultural background of the decision makers. In the sense that “semiotics tries to explain how a message is created so it can say what it denotes” (Marroquín, 2006), it seems clear that the aforementioned cultural background difference is crucial since it determines the association between signifier and signified made by people of different cultures. Cultural differences play an important role at least in two different ways. The first has to do with the external environment and refers to the market itself and more precisely to customer preferences. Generally speaking, this kind of implication has already been interiorized by most companies and they now consider it very carefully when making strategic internationalization decisions. The second role, the one which this article emphasizes on, concerns 5 Although the term was first used in the classic Greece by Galeno, Charles Sanders Peirce is widely considered one of the founders of this field of study.
  8. 8. CHINA. A CULTURAL STRATEGIC APPROACH 8 the internal environment, that is to say, the management not only of the people who participate in the strategic decision process but also of the process itself. The matter of multicultural team management requires a comprehensive understanding of the situation faced by the team and the optimal solution should include the increase of the common cultural background among the team members. It is a long process of new and conscious enculturation that affects each member asymmetrically. Encyclopedia Britannica defines enculturation as a process of cultural transmission; and for practical purposes, especially considering primitive societies, identifies it with education (Encyclopedia Britannica Online, 2009). RAE defines enculturation as the process through which a person interiorizes the beliefs, traditions, customs etc. of the society in which he lives. In human beings, enculturation means providing the necessary conditions so that a young person can interiorize any kind of culture (Bohannan, 1996) Enculturation includes reorganizing, improving with new perspectives, the mental schemes that make up the basis of an individual’s ability to interpret the reality around him. The process of new enculturation of human resources requires long periods of time until the first results can be appreciated. In spite of the difficulties inherent to this process, the advantages of reducing the differences and of improving understanding among the members of the group is something widely accepted among the strategic decision makers of global companies. Velarde denies that a simple group of people with a common language has, by itself, any important advantage or is able to create higher value (Velarde, 2001). Although his excellent examples of Suajili (Kiswahili), Chinese and Japanese are very illustrative, it is important to clarify something. Using a common language is not a sufficient condition but is a key factor as Velarde himself accepts later on “Most investigations seem to point to a pattern followed by most countries when they invest abroad; they target other geographically and culturally similar countries. The main explanation for this is the existence, in this case, of the so called Marshallian external economies.” (Velarde, 2001) As it is discussed in section 5, overcoming or reducing the impact of cultural differences might be extremely complicated and would very likely induce extra cost. Therefore, correct management of those cultural differences could be considered a key factor in obtaining a competitive advantage. “The fact that managers and staff share a common language, without other additional problems, is an externality, an important element to increase savings and efficiency. That is why Uppsala school’s economists emphasize that whoever
  9. 9. CHINA. A CULTURAL STRATEGIC APPROACH 9 invests abroad, assuming higher risks than in the domestic market, is usually concerned about reducing those risks and that is the reason why countries with a similar culture or language are often preferred.” (Velarde, 2001) The fact that companies tend to choose markets as similar as possible is de facto behavior. However, this study focuses on those cases in which a company chooses a new market such as China, where substantial differences can be observed. Obviously, the company would be interested in minimizing the negative impact of those differences, regardless of the reason why it made that decision. In general, different levels of similarity can be considered: • Same country (A) • Different country; same language (B) • Different country and language but existence of a common language, the language of one of the countries or a different one that can be used by both parties (C). The case for some Spanish companies in China • Different country and language and no possibility of using a third language (D). The need for interpreters is obvious in these cases and new communication problems arise. Unfortunately, the case for countless Spanish companies in China. Communication problems may arise in any level and each level demands a different set of measures. However, levels C and D require the adoption of stronger and more sustained actions. The main issue faced by multicultural decision-making groups is similar to the problems an anthropologist faces in his field work. The anthropologist, during his study of a human group, different from the one in which he was first enculturated, must solve different kinds of communication problems, especially in the transmission of meanings. The following aspects should be considered: • What each individual says • What each individual means • What each individual thinks the others said or meant • Differences between what each individual says and his actual conduct • Additionally, in level D, a new source of conflict appears due to the presence of interpreters All these conflictive points could influence the perception and interpretation of new situations. The agreements and conclusions, and especially, the way each individual understands them could also be influenced by those conflictive aspects. Ferrer & Sánchez (1996: 51) say: "In the correct interpretation of a message, the communicative
  10. 10. CHINA. A CULTURAL STRATEGIC APPROACH 10 competence of the receiver is essential, because the receiver has to infer the missing information according to the explicit content of the previous messages, and that way, he gives coherence to what he is listening”. This competence is also crucial between people speaking the same language. Different linguistic practices, especially the ellipsis6 , used in each language, usually tend to produce a conflict with unstated information and implicit meanings, as well as connotations that dramatically reduce the level of mutual intelligibility. Assuming the difference between exophoric ellipsis and textual ellipsis (Poblete, 2002), and focusing on the first one, since it is more closely related to the goal of this paper, because it is more influenced by the previous interaction and by the common culture between sender and receiver, there is a new element to strengthen the hypothesis that any communication process has a high component of unconscious acceptance of tacit meanings. Together with the misunderstandings and confusion that take place during communicative interaction, especially in decision making processes, in which the agents try to make up solutions from the base of different individual perceptions, there is another common problem that often amplifies those pernicious effects, that is to say: ethnocentrism7 . The widely spread ethnocentrism implies that whenever a conflict between cultures or habits arises, each individual tends to think that his culture or habit is superior to those of others. “Ethnocentrism is a nearly universal syndrome of attitudes and behaviors” (Axelrod, Hammond, 1999). Many other authors agree about the universality of ethnocentrism. If that is so, the rejection of anything that does not match with the standards interiorized by an individual in his enculturation process is a natural innate human conduct. Without having necessarily to fall into Cultural Relativism8 , it is true that empathy is one of the prerequisites among the members of a multicultural group. Through empathy, it is possible to improve understanding, reduce rejection and make decisions that are better adapted to the reality of the company’s activities. 6 RAE, “literary device, consisting in omitting from a sentence one or more words that are necessary for the correct grammatical construction but not for the transmission of the precise meaning”. 7 RAE, ethnocentrism is the “emotional trend that identifies the own culture with the exclusive criteria to interpret other groups, razes or societies’ behaviors” Bohannan (1996) adds that it can be a conscious or unconscious attitude. 8 Franz Boas established the basis of cultural relativism, emphasized empirical study, and shifted the concept of culture to a plural sense, which stressed the diversity of “cultures”. He considered that it was necessary to understand cultures in their own terms and contexts.
  11. 11. CHINA. A CULTURAL STRATEGIC APPROACH 11 In a constantly changing environment in which information is not only central but is also gaining more and more importance, the translation, homogenization and adaption of information is an issue that calls for an integrated and comprehensive approach, that takes into consideration cultural differences among the users of the information. It is very common that the users of certain information get it from a source that uses a language different from theirs, and even different from the language of the original sender. Deciding which language or languages will be used to store the information is vital in minimizing the data loss which arises during the encoding and decoding processes. It is important to point out that although the number of people learning Chinese language and culture is rapidly increasing, there is still a certain asymmetry between the likelihood of a Chinese person to study other cultures and the likelihood of a foreigner to study Chinese culture. Section 3. Empirical study of the importance of cultural differences for strategic decision making A classic problem affecting multicultural research appeared during the preparation phase of the study. Since cultural differences condition the way people interpret, answer and react to the questionnaire, the research is affected by the object of its study. Every questionnaire containing errors was eliminated but all of them were very useful for the comprehensive understanding of the results. The final base for the study was a panel including 54 experts with international experience in strategic decision making as well as other disciplines correlated with the aim of the study. The questionnaire consists of two parts. The first part includes a characterization of the expert. The most important variable in the first part is the country of origin, since it is used to establish the corresponding correlations with subsequent questions. Similarly, this variable can show the variability of the experts, primarily composed by people from Spain and China. ORIGEN EXPERTOS 0 5 10 15 20 25 30 35 USA BRASIL CHINA FINLANDIA FRANCIA ALEMANIA INDIA PORTUGAL ESPAÑA TAIWAN VIETNAM Figure 3. Distribution of panel experts according to their country of origin EXPERTS COUNTRY OF ORIGIN Vietnam Portugal USA Taiwan Spain India Germany France Finland China Brazil
  12. 12. CHINA. A CULTURAL STRATEGIC APPROACH 12 The second part of the questionnaire contains three different questions: • First, there is a semi-open question, which evaluates the importance that the expert places on linguistic and cultural differences compared to other key factors when deciding which market to expand its activities to. FACTORES CLAVE 0 5 10 15 20 25 RECURSOS FINANCIEROS TECNOLOGÍA CULTURA IDIOMA ENTORNO LEGAL ENTORNO POLÍTICO OTROS Figure 4. Comparison of the importance of key factors The most common answer is “financial resources”. Linguistic and cultural differences remain in the background. However, as it is discussed later, the necessary resources to solve cultural differences may be extremely expensive if at all available, unless careful planning has previously been made. “Cross-cultural misunderstanding is a much-underestimated cause of trouble” (Hofstede, G.J., Pedersen, P. and Hofstede, G.H., 2002). • In the second question, the expert may freely choose a maximum of five countries that will become five likert elements. Therefore, the maximum number of answers, given the number of experts, could add up to 270. The real value is 227, average of 4.2 per person. In this case, the expert is asked to evaluate the impact of cultural differences for each of the countries he has previously chosen (according to a five points scale). The exact statement could be formulated as follows: the level of misunderstanding between your country of origin and each of the countries you have chosen, caused by communication problems is high. KEY FACTORS Others Political Legal Linguistic Cultural Technological Financial
  13. 13. CHINA. A CULTURAL STRATEGIC APPROACH 13 DIFICULTAD APARENTE (9) (14) (17) (8) (6) (14) (8) (23) 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 China Japón Alemania España India EE.UU. Reino Unido Rusia Figure 5. Apparent difficulty. Average. (Number of answers for each country in brackets) China is the country about which the experts have expressed their opinions most frequently. That gives more significance to the results. Moreover, China has the second highest score, which means that the perceived complexity derived from cultural differences is the second highest, as well. Specifically, the level of complexity has been ranked between high and very high. According to the data presented in “Doing Business 2009”, published by the World Bank, China ranks in the 83rd position, even after countries such as Kenya, Panama or Trinidad and Tobago. The variables considered in that study are mainly related to the regulatory situation of the country, variables that are totally out of the control of the company. That is one more reason to focus on reducing the effects of other variables that are more easily affected by the company’s policies. • The third question is a closed question in which the expert is forced to choose, according to his own opinion, the country with highest barriers to entry. This information is compared with the country of origin of each expert, as well as with his answers to the previous question. APPARENT DIFFICULTY Russia China UK USA India Spain Germany Japan
  14. 14. CHINA. A CULTURAL STRATEGIC APPROACH 14 DIFICULTAD POR PAISES 0 2 4 6 8 10 12 14 16 ESPAÑA JAPON BRASIL CHINA RUSIA EE.UU. VIETNAM ALEMANIA INDIA Figure 6. Ranking of countries according to their barriers to entry China is clearly the country chosen the highest number of times, followed by Japan, Russia and Vietnam. Although no conclusive evidence has been obtained, instead of the level of development, political situation or regulatory environment, cultural differences intuitively seem to offer the explanation for this pattern. However, further investigation is needed in this aspect. • Finally, there is one more question about the reasons that made the expert answer in a certain way to the previous question. The intention of this question is to establish a link with the first question. Surprisingly, while only 17% of the experts consider linguistics and cultural differences as a key factor for the success of the project, 59% of them include these factors in the explanation of why they have chosen a certain country as having the highest barriers to entry. This situation could reflect the general idea that if financial resources are abundant, most problems can be overcome, something that could be true but that does not eliminate the fact that cultural differences need to be considered from the early stages of the project. Section 4. Multicultural strategic decision model. A generalization of the multi-agent model Going deeper into the aforementioned issue of personal experiences and cultural background, it is necessary to mention that the declarative memory of two individuals who have been enculturated in different environments would be affected in different ways. Not only the content of their episodic memory would be different but it would RANKING COUNTRY’S BARRIERS TO ENTRY India Germany Vietnam USA Russia China Brazil Japan Spain
  15. 15. CHINA. A CULTURAL STRATEGIC APPROACH 15 also be different the content of their semantic memory9 . A double effect is then observed. On one side, agents would disagree about the interpretation of the new situation. On the other side, once the agents have finally agreed about the diagnosis of the situation, they would also probably disagree about what actions need to be carried out. For example, two people may have a different opinion about whether the price of a product is high, but they may also have a different perception of what an increase or decrease in that price would imply. The starting point of the multicultural model is to accept that associative memory and analogy are the pillars of individual recognition and decision making processes. The main practical implication is the assumption that when an agent faces a novel situation, he will try to interpret it in terms of the information previously stored in his memory through a search process based on association. The Hopfield neural networks model (Hopfield, 1982) is ideal for the purposes pursued in this article, mainly due to its simplicity, explanatory capacity and how well it meets the hypothesis introduced in the previous paragraph. Based on the Hopfield model, Giovanni M. Gavetti and Massimo Warglien proposed a multi-agent model with some simplifying assumptions and prepared the analytical framework of the model. Similarly, from the results of the model, a few conclusions about the influence of communication process and group structure were obtained. The group structure is reduced to only two possible alternatives: star and point to point structures. The multi-agent model considers the group as a network of networks. Each node of the network (each individual) has an opinion about whether the feature if is present in the situation being recognized. The group has a certain communication structure and if two agents communicate with each other about the presence of a certain feature, the final situation will depend both on the respective initial states and on the intensity of the communication between them. Generalizing for n individuals, the final state for each agent will depend on the weighted sum of all the stimuli received from each member of the group according to the strength of the communication between each pair of agents. If the global stimulus received by a certain individual exceeds a certain threshold, the agent will change his opinion; otherwise, he will remain in his initial state. This is, basically, the explanation of how the multi-agent model works. 9 “Episodic memory refers to memory for personal experiences and their temporal relations, while semantic memory is a system for receiving, retaining, and transmitting information about meaning of words, concepts, and classification of concepts” (Tulving, 1972: 401-402)
  16. 16. CHINA. A CULTURAL STRATEGIC APPROACH 16 For the particular case of one agent and n features that may or may not be present in the considered situation, the equation of the model would be: )sgn( j j iji sws ∑= (1) Here, is and js represent the pair of features ij , and ijw determines the weight of the relation between is and js . Especially relevant is the introduction of γ as a parameter to represent intensity of communication between agents. This parameter is considered as a characteristic of the group and therefore, equal for each pair of group members. Once the multi-agent model has incorporated the communication effect, the equation of the model would be:           +=+ ∑ ∑ ≠ = j n kp p p i k j k ij k i tstswts 1 )()(sgn)1( γ (2) Gavetti and Warglien study three parameters: a) intensity (impact of the messages to the receiving agent), b) density (quantity of people interacting with each other) and c) scope (complete or specialized) of communication. The main conclusion is that through intergroup communication, it is possible to achieve superior and totally new interpretations of a situation, as opposed to the result that would have been obtained individually. The generalization to the multicultural model will try to solve some of the simplifying assumptions. As noted at the beginning of this section, when the distinction between episodic memory and semantic memory was made, cultural heritage of each individual is radically different; consequently convergence towards a unique perception is very complicated. Even after getting to an equilibrium point, measures taken in each situation would also be different. Obvious examples are often observed in international summits in which certain groups of countries tend to cluster according to their economic interests and cultural proximity, partly because they share to a greater extent, both the interpretation of the problem and the solutions to deal with it. It is important to highlight that it is highly unlikely that individuals place the same importance to the same set of issues and give equal weight to each of the questions and interactions between them. The mathematical foundation of the model guarantees the convergence towards a unique result. This useful property, at an individual level, intuitively implies that when a person faces a novel situation, he will unfailingly reach out to a satisfactory interpretation of that situation in terms of content stored in his memory. This convergence is also guaranteed in the multi-agent model, and implies considering the group as an independent entity capable of
  17. 17. CHINA. A CULTURAL STRATEGIC APPROACH 17 interpretation. Especially in multicultural contexts, the interpretation of the group might never be internalized by some of the group members, at least not in the generally accepted way. One of the problems outlined in section 2, referred to differences between what people say and what they really mean. These differences are particularly important at this point because even once the equilibrium point has been reached; it is common to find out that the interpretation of the agreement varies from agent to agent. Notwithstanding, it seems clear that the positive effects of communication can lead the group to better interpretations, from the decision making point of view, than those that would have been reached individually. Therefore, what is beyond doubt is the importance of communication to reach this new group state. In cases where the languages of the agents are not mutually intelligible, the problem of reliable communication usually gains importance and could ultimately lead to wrong interpretations as a consequence of the distortion of the premises or of the decision making process itself. By including a coefficient of mutual intelligibilityα , called Cultural Intelligibility Coefficient (CIC), which reduces the value of intensity of the communication, a situation much closer to the reality of multicultural environments can be represented. The CIC has a similar mathematical effect to explicitly considering noise in the model. Mathematically, no further reformulation is required since after the introduction of the CIC, which is denoted asα , what would be obtained is a new value ofγ , ' γ which is equal to the productαγ . Conceptually, however, there is a clear difference. The part of the noise due to multiculturalism may now be the object of systematic study and planning. The CIC represents the manageable part of the noise. Therefore, there is a conceptual basis for its consideration. It is also shown mathematically that the quality of the communication is directly proportional to the CICα , thus the company should obviously try to maximizeα . Quantification ofα would be of great interest and further research should be done in this sense. In the multi-agent model a commonγ is assumed for all members of the group. Similarly, in the multicultural model the starting point would be to consider four theoretical values ofα depending on the case according to the classification proposed in Section 2. An average value for the specific considered decision group should then be calculated. In general DCBA αααα >>> , where A, B, C and D are the possible situations described in Section 2. A deeper study would involve the calculation of theoretical coefficients for different pairs of individual countries, for example CHSP−α or BRSP−α for the specific cases of Spain, China and Brazil. Having these bilateral coefficients
  18. 18. CHINA. A CULTURAL STRATEGIC APPROACH 18 would give a new basis to decide the suitability of choosing a particular country or at least an additional element to estimate the extra costs associated to the expansion to that country. The CIC varies between zero and one, 10 << α . Consequently ' γ would range between zero andγ , γγ << ' 0 . The extremes values would never be achieved, especially when time is included as a variable, instead of considering static situations. The introduction in the model of the CIC has, thus, important implications for all parameters previously listed: intensity, density and scope of communication. In relation to intensity, the influence is direct and is derived from the mathematical and conceptual definition of the CIC. As for the density and the scope, the impact is better understood if we consider the emergence of the figure of the interpreter, who will be more needed the lower the CIC is. On the one hand, the introduction of interpreters is a reasonably common measure to solve communication problems. On the other hand, it should be considered that interpreters are more likely to reduce the scope of the communication since the difficulty of finding a replica of the knowledge of an individual is quite high. Finally, unless a parallel structure of interpreters is created, with the corresponding increase in costs, the selective introduction of interpreters tends to set up a star or group of stars communication structure in which interpreters are the nodes of the communication channels, consequently determining the density of this form of communication. It is also necessary to consider the fairly common case in which the availability of qualified interpreters is somewhat limited and, whatever the selection, the communication structure will be influenced and to a certain extent the future results will be affected. The decision to increase the CIC could even be considered a pre-strategic decision, since its goal is to improve the basis on which to settle the long-term future decisions. Section 5. Maximization of the CIC. Competitive Advantage Porter (1996: 65) argues that competitive strategy is closely related to the ability to differentiate. Usually, companies seek to do different things from what their competitors do, or to do the same things but differently. Benchmarking becomes a more difficult task when companies achieve that differentiation. Similarly, the greater the variability, the greater the difficulty to manage change and conflict, but the easier it is to achieve differentiation. In multicultural environments, variability is inherent and particularly relevant. “Mindsets evolve through a process of interaction between a person and the environment. Our current mindsets shape our interpretations of the world around us; in turn, these interpretations affect whether or not our mindsets
  19. 19. CHINA. A CULTURAL STRATEGIC APPROACH 19 change or remain unaltered” (Govindarajan and Gupta, 2001). The environment can present threats or opportunities for the company but in any case, the company must respond to changes by adapting, at least partially, to those changes. As a first approximation to the importance of the CIC, it is necessary to say that a company that holds a higher CIC than its competitors will get a number of advantages in several different activities. Advertising campaigns, for example, will be more adapted to local realities; human resources management policies will better reflect the peculiarities of both the local and expatriate staff, avoiding conflicts. The company will also find it easier to take advantage of costs advantages in the destination country while using management systems more suitable for the group as a whole, in the case of global companies. “To gain maximum benefit, the executive team should share its vision and strategy with the whole organization, and with the key outside constituents. By communicating strategy and by linking it to personal goals, the scorecard creates a shared understanding and commitment among all organizational participants” “A prerequisite for implementing strategy is that all employees, senior corporate executives, and the board of directors understand the strategy and the required behavior to achieve the strategic objectives” (Kaplan and Norton, 1996) Game theory is the conceptual framework for analysis of situations and, as stated in Section 4, the interpretation of these situations that individuals or groups of individuals make is considered to be based on analogy on the basis of associative memory. Most authors have traditionally considered that communication is a pre-strategic issue. In fact, until recently that approach could have been accepted. The conceptual shift is based on the process of globalization, particularly on the emergence of transnational corporations, the need for differentiation, the fact that consumers have increased their demands, and on the increasing emphasis on corporate social responsibility. In this sense, the inclusion of cultural management in a company's strategic plan and establishing the maximization of CIC as a company’s main goal could provide a sustainable competitive advantage. Following the terminology proposed by Rumelt, isolating mechanisms determine the sustainability of competitive advantage (Rumelt, 1984) and it should be noted that a company engaged in proper cultural management could gain a competitive advantage difficult to identify by its competitors and therefore would strengthen its inimitability. The shortage of skilled, doubly encultured, or at least bilingual labor is a fact in China, probably as a consequence of the rapidly growing demand of such kind of staff. As noted by Kaplinsky (2005: 53, 66, 234), higher performance is
  20. 20. CHINA. A CULTURAL STRATEGIC APPROACH 20 based on scarcity and puts it in relation to the existence of barriers to entry as a means of achieving a sustainable competitive advantage. In this case, imitation is possible, but it generally requires a long period of time, which serves as the basis for a new competitive advantage in the terms pointed out by Porter and Wayland (1995: 90-91), when they state that business objectives must be measured in relation to dynamic parameters such as the company's ability to evolve, innovate and adapt itself to the changing circumstances. “A firm’s ability to earn a rate of profit in excess of its cost of capital depends upon two factors: the attractiveness of the industry in which it is located, and its establishment of competitive advantage over rivals” (Grant, 1991) “The finding that competitive rather than external environments is the primary source of inter-firm profit differentials between firms focuses attention upon the sources of competitive advantage” (Grant, 1991) The superiority in the management of CIC through appropriate planning and implementation by a company, especially when the effort is a determined and sustained one, could be considered a potential source of competitive advantage. This particular competitive advantage can be obtained in several ways: by incorporating human resources with relatively lower cost, by improving the main KPI of human resource management and also by increasing the individual performance within the decision making group and within the company as a whole. However, the most important effect is undoubtedly the achievement of more accurate (or quicker) strategic decisions, basically through the elimination of distortions caused by communication problems. Decision making is an iterative process. As formulated in Section 4, consensus over the perception of a particular situation depends both on the initial situation and on the subsequent interaction among the members of the decision group. Therefore, any distortion in the communication can be amplified in the later stages of the process, producing a feedback effect and, consequently, a growing divergence from the initial situation. The concept of "dynamic strategic fit" introduced by Hiroyuki Itami emphasizes how important it is for the company to pursue not only the use of available resources but also the creation of new ones on the basis of experience (Hiroyuki Itami, 1987). Maximizing the CIC would be the ideal starting point to enhance the creation of new capabilities. Organizations can achieve significant synergies simply by establishing an internal communication integrated with corporate strategy and their global policies (Kunsch, 2002).
  21. 21. CHINA. A CULTURAL STRATEGIC APPROACH 21 In the current environment competitiveness is increasingly high. More and better specific training for everyone within the organization is required. Many executives understand that a high level of communication is the key to achieve highest performance (Ulrich, 2003). The company size and its financial capacity, along with the availability of other resources allow certain corporations to have identity independence. Very frequently, organizations with a strong positioning in customers’ minds in certain market segments are not associated with their countries of origin but have a distinct cultural identity instead. This is not possible in the case of a large amount of smaller companies whose internationalization processes depend on the inclusion in a national or sectoral plan which links them to the image of the country or of a specific region. The study of human communication is within the scope of several disciplines such as anthropology, linguistics, or even philosophy or psychology. However, at this point, the importance of communication should be emphasized since the strategic decision making process requires the transmission of complex concepts, complicating the work of translation and interpretation. In these settings, in order to agree about appropriate measures and actions, open, fluent, and flawless communication is essential for the individuals involved in making decisions. As already shown, China has a low cultural exposure to the outside world compared to other countries with similar levels of economic development. In any case, it should be noted that the external exposure refers to exposure of a given country to a globalized culture (with a large U.S. or European influence, but not necessarily equivalent to one or the other). Even though that exposure is low in the case of China, if there is a bilateral comparison, the conclusion drawn could dramatically vary. In the extreme case of a bilateral comparison between the U.S. and China, it could be seen that the U.S. is more exposed (and also has a higher influence) to the global culture than China. However, there is a greater knowledge of the U.S., its language and culture in China than vice versa. That is so in spite of the growing number of students of Chinese and the increasing interest towards China in the U.S. The knowledge foreigners have about China, its culture, language and customs is still quite limited and vice versa. This intensifies the competition to attract an increasingly scarce resource: talent. Mintzberg's appreciation of the separation between planning and implementation (Mintzberg, 1985) is even more important in a multicultural environment since the differences between decision makers and decision implementers makes it especially necessary to have an excellent interconnection between both processes. The export of low-cost products that has greatly contributed to the growth of the Chinese economy during recent years has also contributed to the image of poor quality sometimes associated with Chinese products. The reality is
  22. 22. CHINA. A CULTURAL STRATEGIC APPROACH 22 that in many cases, the required level of quality is well above the local standard. Therefore, factory operators, supervisors, middle managers and even senior management too often face a particularly difficult problem because they lack the necessary multicultural vision about the destination countries of their goods. It also happens very often that precisely because of such different quality standards, the difficulties for foreign goods to penetrate into Chinese market are quite high, especially in industrial markets, where decision making is more rational. This asymmetry also has the peculiarity that the greatest problem is precisely the most difficult to solve because the percentage of employees from the host country is usually much higher than that of employees from other countries. The main implication of this circumstance is the difficulty to transmit organizational culture to the group based in the new location. To solve this asymmetry, an increase in costs could often compensate the benefits of off shoring. For manufacturing companies with large numbers of workers, in which the division of labor is possible, specialization of tasks might be appropriate so that the cultural background of each person has no influence in his job. Minimization of communication needs is achieved due to the simplicity of the specialized tasks and the use of appropriate middle managers. Another widely used option is offshore outsourcing through OEM factories, together with strict quality control. With this second option, in certain cases the potential to generate sustainable competitive advantage is lost trying to avoid the management of a culturally hostile environment. Then, it is important to remember that each organization’s situation is different and that the benefits obtained from the maximization of the CIC are different too. Although it might appear otherwise, the previous ideas are not a consequence of ethnocentrism, since they do not imply a higher estimation of a culture over another but merely show the existing differences in terms of clearly differentiated customs and expectations. Another aspect to consider is that most companies (especially larger ones) are conscious of the importance of mutual understanding and proper cultural management. The two issues that are often overlooked are the true extent and future profits that improvement of the CIC could have. The time required to yield the first results of cultural management will probably be relatively longer. Therefore, it would also be a mistake to downplay the need to begin such planning as soon as possible. To start measuring the effects of cultural management, a detailed research about the payback of cultural investment should be conducted. Similarly, further research is needed to study the correlation between cultural management and increase in profitability.
  23. 23. CHINA. A CULTURAL STRATEGIC APPROACH 23 Conclusions. Through a novel approach, cultural management is put into focus at the strategic level as a means of gaining a competitive advantage for the company. This competitive advantage in turn has a multiplier effect that enhances the future generation of new capabilities for the company. This inclusive and conciliatory vision of various disciplines is the basis to improve the proposed approach because multicultural environments are characterized mainly by a high variability and by complex interactions. Although it implies more simplification, the development of a consistent model based on mathematical formulation gives greater value to this approach. Objective data obtained from the model lessens the diversity of views and interpretations and provides a basis for homogeneous analysis. Much of the validity of this study is based on the consideration of certain staff profiles as a scarce resource. Therefore, changes in supply and demand of this resource in the coming years will determine the importance of many of these considerations. However, this approach has a clear long term orientation since the situation could only change from impossibility to succeed in a project based on scarcity to superior performance based in the correct management of cultural diversity. Difficulty of CIC quantification constitutes a handicap and a challenge at the same time. Among the new lines of research, probably the first one should be to estimate the four theoretical coefficients for situations A, B, C and D described in Section 2. Similarly, further research for specific pairs of countries should be done. Finally, it would be possible to conduct ad hoc sectoral or individual researches, including benchmarking. It is also important to note that CIC is a dynamic parameter and consequently, periodic updates would be necessary. Payback of investment in cultural management is also difficult to measure. The central goal should be to quantify the statistical relationship between CIC management and profitability. Finally, regardless of the position that China has in any ranking, of the difficulty that its culture represents for foreign companies, or of the emergence of other countries that represent a serious alternative, the potential that China represents for any kind of company is still remarkably large. The most important thing is being able to see the opportunity that China brings to you. Afterwards, correct planning and comprehensive project management, including cultural management, will do the rest.
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